Stock Question?

Question

An individual plans to invest in Stock A and Stock B. The expected returns are 12% and 18% for Stock A and Stock B respectively. The standard deviations are 6% and 12% for Stock A and Stock B. The correlation between A and B is .15. Find the expected return and the standard deviation of a portfolio with 80% of the investor's funds in Stock A.

Does anyone have a clue on how to do this? Can someone help?

Thanks

Answer 1

"Find the expected return"--this is just a math problem. It has nothing to do with real life. Future expectations are mere guesses. We don't know what a company's future earnings are, we make educated guesses, but statistical play is something to occupy your time with until the real numbers are announced.

The question is how does the market view performance and expectations at the moment. Sometimes the math works, most of the time it is just an exercise--like Shaq sinking practice shots by the hundreds but throwing bricks at the free throw line during the game (although he used to be much worse).

Think of it, if simple math were all it took to figure stocks, then every college math major will automatically be on the fast track to the Forbes 400 list.

Answer 2

Just multiple the weights into the equation.

12%*.8 + 18%*.2 = 13.2 reutrn
6% * .8 + 12% * .2= 8%

Answer 3

You should also post this question under mathematics. I know you'll get an answer there.